Bank of England ‘blindsided’ by unexpected elements of mini-budget

The deputy governor of the Bank of England has said that the Government did not fully brief the Bank on its mini-budget and sweeping tax-cutting plans before it was unveiled.

Sir Jon Cunliffe was asked by Mel Stride, chair of the Treasury Committee, whether the mini-budget, unveiled by former Chancellor Kwasi Kwarteng on September 23, had “blindsided” the Bank.

Sir Jon said: “Like others, we knew there was a fiscal event and we knew some of the things that would be in it because it was very public and in the Conservative leadership campaign.

“But some things were a surprise on the day, to us as to others.

“We did not have a full briefing of the package the night before.”

He told the Treasury Committee that the Bank would have advised the Government if it knew there would be such a dramatic knock-on effect on market stability.

“Had they asked us what the market reaction would be, we would have interacted with them.

“But it is not our responsibility to give the Government advice on fiscal policy, it is the role of the Treasury.”

The Bank of England is usually briefed confidentially ahead of the budget and monetary policy, Sir Jon said.

But as the Government needed to “move quickly and move fast”, there was no such discussion.

The governor of the Bank of England, Andrew Bailey, is known to have been meeting regularly with the former Chancellor Kwasi Kwarteng in the lead up to the mini-budget, before ramping up conversations after it sparked turmoil in the financial markets.

The Bank of England was forced to step in and launch an emergency bond-buying programme to settle the markets, after the interest on Government bonds – known as gilt yields – surged to around 5%.

Sir Jon reiterated a point made in a letter to Mr Stride on Tuesday that the Bank’s intervention into the bonds market followed a period of historic rises in yields.

The surge was “outside of historical experiences”, Sir Jon said.

“Yields had been moving up very fast internationally since the start of the new year.

“But the five biggest movements in long-dated gilt yields since we started keeping a record in 2000 came in the period after September 23, until the Bank intervened in the gilt market.”

He added that there was “clearly” a UK component to the market chaos, even though markets are stretched internationally.

Sir Jon said there had been danger that as bond yields rose, the sell-off of gilts would develop into a “fire sale spiral”.

“If it became established … then the gilt market would basically breakdown,” he said.

He said the markets were also reacting to to a new Government they did not know.

“The then chancellor said on the Sunday on television there would be further tax cuts which did have an impact in Asian markets on the Sunday evening,” he said.

Andrew Hauser, the Bank’s executive director, markets, said the situation had developed very rapidly.

“This was a situation which went from ‘We’re ringing to let you know’ to shouting on the phone to us within two days,” he  told the committee.

“This was a full scale liquidation event.”

On the Bank of England’s intervention, Sir Jon said it was always meant to be a temporary operation to buy bonds from the market.

“We were very clear we wanted a temporary, targeted operation and that we were not supporting the gilt market generally. The gilt market does have to adjust to economic policy, whatever that policy may be.”

He added that the Bank plans to unwind its purchasing in a timely and orderly manner, and by going through the same governance.

“The unwind will be a kind of mirror image of the wind,” he told the committee.